Hedging for Disaster – The Corona Crisis Continues

Futures went limit down again.

QE Infinity and $1.2Tn of stimulus wasn't enough, it seems.  Here's the problem – even if you give every man, woman and child in this country $2,000 a month ($600Bn) – where are they going to spend it?  

Even if the US is that generous (we're not), what about the rest of the World?  If every country doesn't do something similar, we're still looking at a global Recession.  Recessions end when people goo back to work and things start getting back to normal.  The problem is, there's no "normal" in sight at the moment. 

As I keep saying – you have to fix the crisis first – NOT the economy!

This is like firemen showing up at a house fire and painting the house while the fire rages on - who cares about that?  

Image result for federal throw money on the fire

As you can see from this 1934 cartoon, this isn't the first Government that's taken a crisis (the dust bowl at the time) and thrown money at it.  Money didn't stop the farms from failing and money didn't solve the bread lines or the cascading unemployment that ended up destroying the economy in the Great Depression.  The Trump Administration has been propping up the markets since 2017 and have already used all the Fed's firepower and put us $3Tn more in debt in 3 years of Trump and now, when we have an actual crisis – even $1.2Tn doesn't seem like enough to "fix" things.

Image result for bloomberg tv homeBloomberg reporters are reporting from their homes – how's that for inspiring confidence!?  As I noted this morning in an Alert to our Members:  

Sadly, we'll have to add more hedges today, in case 2,400 breaks down and we head for 1,800.  Fortunately, that's down 25% so up 50% on SDS, which is already at $34 so $51 would be the target and the SDS May $35 ($7.50)/50 ($4.50) bull call spread is just $3 and pays $15 so 400% upside potential means we can get $100,000 back for each $25,000 and we just sold $81,000 worth of short puts in the LTP


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2,400 Tuesday – S&P Tests the Bottom of our Target Range

How low can we go?  

If 2,850 is our Must Hold Level (below which we are bearish – and for good reason apparently!), then 20% below that is the bottom of our range and that's 2,280 and the S&P 500 bottomed out at 2,350 yesterday so we're not quite there though we certainly attacked it with a running start as the index fell 325 points (12%) on heavy volume.  

As I noted yesterday, while this is now close to 40% from the top, we had no business being at 3,400 in the first place so stop thinking we're going to bounce back to there – that would be silly.  It's a lot more likely that 2,850 becomes the top of the new trading range and 2,280 should be the bottom but we're in panic mode now and the selling volume is still overwhelming the buying interest so we could go quite a bit lower – but it's going to be a great buying opportunity…  at some point.

It's an incredible buying opportunity for people who still have cash to spend but a 40% drop in the market tends to make people very cautious.  As I noted last Thursday, as we dipped to 2,480, our prefered way of bottom-fishing is to sell puts, because it puts CASH!!! in our pockets by simply promising to buy stocks for an additional discount – far below where they are trading today.  

Since we're back near the bottom of our range (and, keep in mind, things can get worse), why don't we look at some more stocks we'd like to own if the World doesn't end?

  • Intel (INTC) – $44.60 is $190Bn in market cap for a company that has made over $20Bn for the past two years.  Yes there will be a slowdown this year but this is not a Zombie Apokalypse, this is a virus and, even if it kills millions, that still leaves Billions of people who will still want computers, phones and tablets.  Again, we're not looking to buy them for $44.60 but we can sell the 2022 $30 put for $4, which is promising to buy them for net $26 and requires just $463 in margin selling 10 of them for $4,000 in our Long-Term Portfolio (LTP).


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Monday Market Mayhem – Limit Down (Again) as Fed 0% is NO HELP!

We are limit down – again.

Since Europe is down about 7.5%, it's very likely we have further to fall at the open since Europe did not partake in Friday's "rally" and is now 5% below Thursday's lows so we could be looking at 20,000 for the Dow (down another 1,800 points from the Futures and down 3,000 points (13%) from Friday's close), S&P 2,300, Nasdaq 6,300 and Russell 1,050 – horrifying numbers.  

Of course, things got much worse in 2008, when the Dow fell from 14,000 to 6,000 – that was down 57% and, so far, we're only down from 29,500 to 20,000 (expected) – that's "only" 32% so whoa, whoa, we're halfway there – maybe…

This is happening DESPITE the fact that the Fed cut their base rate to 0-0.25% over the weekend but they also cancelled their scheduled meeting this week and that bothered people as well as the Trump Administration's continuing inept response and lack of leadership.  THIS is why I have been anti-Trump since the 2016 election – what did you really think was going to happen in a crisis with this President?  Did you really think he was going to step up and provide the clear leadership and vision this country needs in a time of crisis?  

So we have a complete crisis of confidence and that's why EVERYTHING is liquidating, including gold ($1,475), silver ($12.00 – a buy at this price!), copper, oil ($29.50 – a buy at this price), cattle (yes, cattle is down 45%), corn, soybeans, wheat – no asset is safe as people go to cash but the Fed Funds rates are now so low that you will soon have to PAY the banks to hold your money – yet another stealthy way Trump is going to tax the American people (and the tariffs are still on too).  

The Dollar, as you can see, is down 1% today but up 3% in the past week, that's making it very expensive to convert your assets into CASH!!! but that's what people are doing at an alarming rate.  Why, because they have NO CONFIDENCE that the Government can fix the virus problem and, as I said to our Members over the weekend:

I’m just keeping an eye


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Federally Fueled Friday – Fed Buys a Rally for $1.5Tn – Will it Last?

After finishing down 2,000 (10%) points on the Dow and 260 (9.55%) on the S&P, this morning the Futures are limit up.

While that's exasperatiing – it can also be very profitable, especially as we played the 2,500 line bullish on the S&P 500 Futures (/ES) and they are now up over $4,000 per contract (you're welcome!) as /ES gains over 100 points in the Futures, hitting the 5% circuit breakers pre-market but there are no upside breakers in regular trading so we'll see how much of that 10% we can recovery now that stimulus talk is beginning to overwhelm virus talk – for today, at least.

We also have our long position on Oil (/CL) which is up another $1,600 per contract this morning as Oil crosses back over $33 and we've been playing those since $30 and already took half off at $32.50 so we're very comfortable letting those ride a bit further with stops back at $32.50 for now.  

While $1.5Tn is nice, it may not be enough to keep things going as we're waiting to see what kind of other measures the Government is going to take and it needs to be something good into the weekend or we might sell back off into the close.  We expected this, that's why we went long on 10 new positions during yesterday's carnage (see yesterday morning's PSW Report) and why we took the Futures longs but nothing has really changed and what we really need is a well-coordinated response to the virus that restores long-term confidence – that is worth more than any rate cut but, for this Government – it's a very tall order indeed.  

Still, it's nice to take a break from all the down days and we've dropped 30% from the top which means, just to get a weak bounce, we need a 6% gain so 5% in the Futures is certainly not enough to get excited about – keep that in mind when people are talking about a 1,100-point (5%) rally in the Dow with bated breath.  

Image result for joker money burning gifPouring more money on the fire is not going to make
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Thursday Failure – Trump Shuts Travel, Provides No Solutions, No Stimulus – Market Tanks (again)

Down and down we go.

The Futures are off another 5% this morning and that is their limit (like Monday) so it's very likely we're facing another trading halt at the open with a 7% drop in the indexes to start our day.  The S&P 500 is already testing the 2,600 line 10% lower than it was at Tuesday's close (2,882)!  This is already the bottom of the range I predicted for the S&P last night on Money Talk (part 2 is here).  It's also 10% of the 15% that Goldman Sachs said we would fall yesterday – we just didn't think they meant "tomorrow"…  

I decided to post part 2 of the interview because, rather than rehash all the doom and gloom you can hear from anyone this morining (I was all alone in my warnings last month) I want to be constructive and talk about all the great things we can buy.  I am NOT ready to call a bottom yet – the markets could still drop substantially lower if this virus spreads out of control (as I said above) but, as I also said above – you have to be prepared for a move up as well as a move down though Trump's misadventures in crisis management last night do seem to make down the more likely case.

Still, we added three trade ideas to our Money Talk Portfolio and there are PLENTY of blue chip stocks that are going on sale AND the Volatility Index (VIX) is going to be in the 60s this morning and that makes it a fantastic time to SELL options – especially put contracts on stocks we REALLY want to own if they get cheaper.  

We will stay away from banks, insurance and travel stocks as we don't know how bad things will ultimately get and we will keep our entries small on the expectation we very likely may have to roll them or double down on them (or both) if the market drops another 20% but here's the kind of bargains we can engineer for ourselves in this kind of market.  Do be aware that margin requirements can jump up as the stock goes lower…
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Wednesday Weakness – $1.2 Tn in Payroll Tax Cuts Aren’t Enough to Stop the Slide

What will it take?  

Yesterday the Trump Administration announced that they will be seeking the ELIMINATION of Payroll Taxes for the rest of the year.  The Government collects $1.26 TRILLION in payroll taxes so this is a $630Bn bonus for working Americans (the other $630Bn goes to the companies that pay matching funds) and, for Trump, this is his fairest tax cut yet, with only half the money going to corporations and rich people who don't need it - instead of the usual 90-100%.

Aside from the fact that this is yet another thinly-disguised tax break for corporations, NOT collecting $1.2Tn will push our annual deficit close to $2.5Tn – that's adding more than 10% in a single year!  This is in reaction to a virus that, so far, has infected 1,039 Americans – we could just give each person who's infected $1.2Bn – that would make them feel better!

The Bank of England did an emergency rate cut this morning and India, South Korea and Malaysia are also considering cutting rates and our own Fed has a meeting next week along with Japan, Indonesia and the Philippines followed by Thailand and New Zealand at the end of the month.  Thailand, Japan and China have already made stimulus moves and we're waiting on the ECB and Bank of Canada as well.  MORE FREE MONEY FOR EVERYONE!!!

Yet the markets are not doing better at all.  Despite yesterday's impressive "rally", we remained firmly on the sidelines as we never even came close to our "Weak Bounce" line at 2,960 and that's not even a recovery until we cross back over the "Strong Bounce" line at 3,070 and hold that for 2 consecutive days.  

Failing to get back to the weak bounce line in the amount of time it took to fall below it (2 days) means you can kiss a V-shaped recovery goodbye and failing to make a weak bounce in the time it took you to fall from the top (2 weaks) means you are just consolidating for a move down – so that's what we're paying attention to at the moment.

With all this stimulus talk being bandied about, however, I did put out an Alert to our Members this morning to be on the look…
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Turnaround Tuesday – Market Bounces on Stimulus Hopes, Xi’s Visit to Wuhan

China's President Xi went to Wuhan this morning.

The Communist Party leader arrived by plane in Hubei's capital for an "inspection of the epidemic prevention and control work" in the region, according to the official Xinhua news agency.  China's most powerful leader since Mao Zedong is usually a daily fixture in state media but has stayed out of the spotlight for much of the crisis and assigned Premier Li Keqiang to oversee the response to the epidemic – a move copied by Trump, who put VP Pence in charge of US efforts.

China reported only 19 new cases on Tuesday, the lowest figure since it started publishing data on January 21 but there are those calling that data into question amid allegations there is a cover-up aimed at getting Chinese workers, especially farmers, back to work at the beginning of the crucial planting season – regardless of how safe it actually is. 

Image result for trump golf virusPresident Trump stayed safe on the golf course yesterday but made it back in the evening to announce he will seek further tax cuts (duh!) and "very substantial relief" for his friends industries that have gained his favor been hit by the virus.  As usual with Trump, rather than actually having a plan to announce – he was only promoting his next show with a teaser: "I will be here tomorrow afternoon to let you know about some of the economic steps, which will be major.” said our cartoon President. 

Trump's press conference to announce a press conference tanked the Futures but then President Xi helped boost the markets later in the evening and, at the moment (8am) the Dow Futures are up 1,000 points, which is 4%, which is exactly what a weak bounce should be after a 20% drop according to our 5% Rule™ so let's not get too excited just yet…

We adjusted our hedges (as planned) but, otherwise, stayed pretty much on the sidelines in yesterday's carnage and will likely do the same today as 

 

 

IN PROGRESS

 

Monday Market Meltdown – Futures Open Limit Down as Virus Fears Mount, Oil Collapses

Good golly, what a mess!

The Futures get halted when they go "Limit Down" which is a 5% drop before the market opens.  That means there were so many people dumping positions that they pretty much ran out of buyers – something I have been warning could be the consequences of a thinly-traded rally for more than a year now.  

Not that being right helped too much, our current portfolios were adjusted more bullish into the weekend in expectations of a bounce (and expectations of more stimulus) and we're getting the very opposite of that.  Fortunately though, we did cash out of main portfolios back in September, when we had substantial amounts of cash tied up and, as I said at the time:

Hedging a $1.7M LTP would be very expensive and what if next time we didn't time the turn in the STP and instead blew the turn and lost money there as well as the LTP.  Then we'd be back to $2M and needing to make 30% to get back to $2.6M and what if it's hard to make money next year or what if we have another crash and the market is down 40% – it's just too much to risk vs. putting $2.6M safely on the sidelines and simply looking for new opportunities.

 

In November, we started putting some virtual money back to work but just $500,000 in our Long-Term Portfolio and $100,000 in our other Member Portfolios, keeping mainly in CASH!!! – just in case the market finally crashed but this move lower is surprising us and we'll have to wait PATIENTLY to see where things settle out but we can immediately add more hedges in our Short-Term Portfolio (STP), who's primary function is to protect the LTP in just these kinds of cases.  

 

IN PROGRESS

 

 

Friday Failure as S&P 3,000 – What Next?

Well, you can't say we didn't see this coming.

On Feb 27th, I said to our Members in our Live Chat Room:

I think we'll languish around 2,850 (100 points lower) on /ES for a couple of weeks and things will either get worse or better on the global front but that's mid-March and then we're about to get Q1 earnings, which will suck so, if the virus isn't significantly better in 2 weeks, we could be heading into a real catastrophe.

We're right on track and no, it's not me that's great at making these calls, it's or Fabulous 5% Rule™, which also told us to ignore the bounce off the -7.5% line (which was a 10% drop with an overshoot) and the quick recovery to the 5% line meant we ignored the additional 2.5% spike down and watched for 2% bounces off the 3,000 line which would take us to 3,060 (weak) and 3,120 (strong) and then the rule is that we don't believe in the strong bounce unless we close over it and then hold it for 2 full sessions without going under.  

THAT is what keeps us out of trouble.  So we haven't added many new posiitons in this downturn but, yesterday, we did add to some of the positions we already have, taking advantage of cheap rolls and cheap double-downs on value plays we believe have gotten too cheap.  Not that they can't get cheaper – of course – but if we already doubled down we'll be happy to roll lower and if we only rolled lower, we'll be happy to doubled down – but not until we're a good 10% lower – which we don't think is very likely unless the virus gets much worse.  

Fortunately, our portfolios are full of fantastic value positions and, for example, our Money Talk Portfolio, is only down 4% after being up as much as 10% for the year but the positions are very solid.  We can't touch them unless we're on the show (next is April), so they are positions that are meant to be bullet-proof and this is a good test but also a great time for new Members to follow along so let's do a quick review.

  • Sunpower (SPWR)


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$5,000 Thursday – Down We Go Again!

Wheeee, this is fun! 

We talked about how manipulated the market is yesterday morning and, in our Live Trading Webinar in the afternoon (1-3pm Wednesdays) we decided on the following Futures positions:

Shorting /ES at 3,100 and long /CL at $46.90.

3,100 is, of course, the strong bounce line on the S&P 500 (/ES) Futures that we drew for you in our Morning Report and we did go a bit over but we decided to stick with it because yesterday's rapid move higher was just silly as nothing has really changed.  On the other hand, we went long on Oil (/CL) Futures because something was about to change as we expected OPEC to announce production cuts.  And why did we think that?  BECAUSE WE KNOW HOW TO READ THE NEWS!  Trading is not that hard folks – we just read, think and trade…

As you can see from our /ES position, we're already up $5,720 on 2 contracts and we'll put a stop at $5,000 to lock in those gains or, once we fall below 3,050 on /ES – that becomes the stop with a goal of 3,020.  That's over $30,000 in Futures gains since the market began turning down, making a lovely bonus hedge to our portfolios.  That's why we keep shorting the market – it's not so much we are uber-bearish – it's just that we have plenty of long positions so, to BALANCE the portfolio, we prefer to look for things that profit when the market turns down.  OIl (/CL) is an exception as it's a news-driven trade. 

 Oil is surprisingly still at $46.90, I suppose because virus fears are back this morning (yes, it's getting worse but I'm bored talking about it now that everyone else is) DESPITE the FACT that OPEC just annnounced a MASSIVE 1.5Mb/d production cut, so there's still time to join us in the most obvious bet of the week!

"We now convene at a time when the outbreak of COVID-19 has had a **pronounced** adverse impact on economic and oil demand forecasts in 2020, particularly in the first and second quarters" – OPEC President Manuel Fernandez


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